Question 1

If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by

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Question 2

It costs $80 for a dental appointment in the U.S. It costs 600 Egyptian pounds for the same appointment in Egypt. The nominal exchange rate is 7 pounds per dollar. The real exchange rate is

Accepted Answer

To calculate the real exchange rate, we need to divide the cost of a dental appointment in the U.S. by the cost of the same appointment in Egypt, and then multiply by the nominal exchange rate:

Real exchange rate = ($80 / 600 EGP) x 7 EGP per dollar = 0.93

Since the real exchange rate is less than one, it means that dental appointments in Egypt are more expensive than in the U.S.

Question 3

If purchasing power parity holds, the price level in the U.S. is 120, and the price level in Canada is 140, which of the following is true?

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Question 4

According to purchasing power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate?

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Question 5

A basket of goods costs $800 in the U.S. In Belgium the basket of goods costs 800 euros and the exchange rate is .80 euros per U.S. dollar. In Japan the basket of goods costs 720,000 yen and the exchange rate is 900 yen per dollar. Which country has purchasing-power parity with the U.S.?

Accepted Answer

Purchasing-power parity (PPP) implies that the basket of goods should cost the same in each country when converted to a common currency. In Japan, 720,000 yen divided by 900 yen per dollar equals $800, matching the U.S. cost. In Belgium, 800 euros divided by 0.80 euros per dollar equals $1,000, which does not match the U.S. cost. Therefore, only Japan has PPP with the U.S.

Question 6

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30, then people could make a profit by

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Question 7

The nominal exchange rate is .80 euros per U.S. dollar and a basket of goods in France costs 1,000 euros while the same basket costs $800 in the U.S. The nominal exchange rate is 1.2 Australian dollars per U.S. dollar and a basket of goods in Australia costs 960 Australian dollars while the same basket costs $800 in the U.S.. Which country has purchasing-power parity with the U.S.?

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Question 8

If the dollar buys less cotton in Egypt than in the United States, then traders could make a profit by

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Question 9

An MP3 player in Singapore costs 200 Singaporean dollars. In the U.S. it costs 100 US dollars. Which of the following is correct?

Accepted Answer

Purchasing power parity holds when the price of the MP3 player is the same in both countries when converted at the exchange rate. At an exchange rate of 2.0 Singaporean dollars per U.S. dollar, 100 US dollars equals 200 Singaporean dollars, matching the price in Singapore.

Question 10

If purchasing power parity holds, a bushel of rice costs $10 in the U.S., and the nominal exchange rate is 40 Thai baht per dollar, what is the price of rice in Thailand?

Accepted Answer

Purchasing power parity implies that the price of a good should be the same in different countries when expressed in a common currency. If a bushel of rice costs $10 in the U.S. and the exchange rate is 40 baht per dollar, then the price in Thailand should be 10 * 40 = 400 baht.

Question 11

According to purchasing power parity, if two countries have the same price level because they have the same prices for all goods and services, then which of the following would equal 1?

Accepted Answer

According to purchasing power parity, if two countries have the same price level, then the real exchange rate and nominal exchange rate between the two countries should be 1. This means that one unit of currency in one country can purchase the same quantity of goods and services as one unit of currency in the other country. Therefore, both the real and nominal exchange rates will be equal to 1.

Question 12

The ability to profit by purchasing wheat in the U.S. and selling it in China implies that the

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Question 13

If purchasing power parity holds, the price level in the U.S. is 220, and the price level in Japan is 200, which of the following is true?

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Question 14

If the exchange rate is 70 Bangladesh taka per dollar and a bushel of rice costs 200 taka in Bangladesh and $3 in the United States, then the real exchange rate is

Accepted Answer

To calculate the real exchange rate we use the formula:

Real Exchange Rate = Nominal Exchange Rate x (Domestic Price Level/Foreign Price Level)

Therefore, the real exchange rate would be:

Real Exchange Rate = (70 Bangladeshi taka/$) x ($3/bushel)/(200 taka/bushel) = 1.05

Because the real exchange rate is greater than one, we know that the same good (in this case, rice) is cheaper in Bangladesh than in the United States, after adjusting for exchange rates. Therefore, arbitrageurs could profit by buying rice in Bangladesh and selling it in the United States. Hence, the correct answer is B.

Question 15

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?

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Question 16

According to purchasing-power parity, if a basket of goods costs $100 in the U.S. and the same basket costs 800 pesos in Argentina, then what is the nominal exchange rate?

Accepted Answer

According to purchasing-power parity, the exchange rate should reflect the relative prices of the same basket of goods in each country. If the basket of goods costs 800 pesos in Argentina and $100 in the U.S., then the exchange rate should be 800/100 = 8 pesos per dollar.

Question 17

If a dollar buys more rice in the China. than in the U.S., then

Accepted Answer

If a dollar buys more rice in China than in the U.S., it means that the price of rice in China is cheaper than in the U.S. Therefore, one can buy rice in China for a lower cost and sell it in the U.S. for a higher price, making a profit. This would lead to an increase in demand for Chinese yuan, which in turn would increase its value relative to the U.S. dollar, resulting in a higher exchange rate (real exchange rate being greater than 1). Thus, the correct choice is B.

Question 18

If a dollar buys more potatoes in the U.S. than in France, then

Accepted Answer

If a dollar buys more potatoes in the U.S. than in France, then the price of potatoes is lower in the U.S. than in France. This means that the exchange rate between the U.S. dollar and the French euro is such that the U.S. dollar is relatively cheaper than the euro. Therefore, the real exchange rate is less than 1, as 1 U.S. dollar buys fewer euros than 1 euro buys dollars. In this case, a profit might be made by buying potatoes in the U.S. with U.S. dollars (which are relatively cheaper) and then selling them in France for euros (which are relatively more expensive). This would result in gaining more euros for each dollar spent, leading to a profit.

Question 19

The price of a basket of goods is $2000 in the U.S. If purchasing power parity holds, and the dollar buys two units of some country's currency, then how many units of foreign currency does the same basket of goods cost in that country?

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Question 20

A haircut costs 200 pesos in Mexico and $20 in the U.S. The exchange rate is 12.5 pesos per dollar. The real exchange rate is

Accepted Answer

To compare the cost of haircuts in Mexico and the U.S., we need to convert Mexican pesos to U.S. dollars using the exchange rate.

200 pesos ÷ 12.5 pesos per dollar = $16

So the price of a haircut in Mexico is $16. Since $16 is less than $20, haircuts in Mexico are cheaper than in the U.S.

To calculate the real exchange rate, we need to divide the price level in Mexico (in pesos) by the price level in the U.S. (in dollars) and then divide by the exchange rate.

Price level in Mexico (in pesos): 200 pesos 
Price level in the U.S. (in dollars): $20 
Exchange rate: 12.5 pesos per dollar

(200 / 12.5) / 20 = 0.8

The real exchange rate is 0.8, which is less than one. This means that haircuts in Mexico are cheaper than in the U.S. even when we take into account the exchange rate.

Quiz 18: Open-Economy Macroeconomic Models